What To Think About Corporate Tax Reform?

The unfortunate reality of the recent corporate tax code revamp is that the issue is largely supported by members of both political parties, yet it passed with only the support of one. Regardless, there is no question this reform is a tremendous positive for American businesses and workers. While much of the media coverage has focused squarely on the idea that reducing the marginal rate from 35% to 21% is simply a bonanza for already profitable companies, there are several reasons why this legislation is a firm step in the right direction.

First and foremost, the marginal rate reduction of 14% will undoubtedly encourage business investment and formation in America. Simply put, anyone considering starting a business that is wholly or partially unrestricted by physical location is faced with the challenge of determining where to locate. If tax rates are sufficiently higher in one country versus another (enough to offset other potential benefits) most rational investors and business owners will select the lower cost venue. The rate reduction will also encourage individuals who might not ordinarily start a business organized as a C Corp to do so rather than operate as a sole proprietorship or even as an LLC as the new law includes tax benefits to such entities as well. The same applies to investors, more of whom will be encouraged to invest in businesses that can now return more money to shareholders.

As for the notion that already profitable companies will simply retain the tax benefit or distribute the ball to shareholders, such a circumstance is unlikely. This is not to say that certain companies will not employ such an approach, but companies looking to grow, which is the primary driver of enterprise value, will have the incentive and means to invest in existing employees through higher wages, better training, improved benefits, etc. as well as to expand hiring in general. As for shareholders participating in the benefits of lower corporate taxation though higher dividends or buybacks, this should also be a net benefit as there will be additional capital available for other investment as well as discretionary spending.